Austin Retirement Planning Deck Flashcards
Important Numbers for 2022
1. Covered Compensation
2. Defined Benefit Maximum Limit
3. Defined Contribution Maximum Limit
4. 401(k), SARSEP, 457, 403(b) Employee Deferral Limit
5. Highly Compensated Employee
6. Key Employee
7. Social Security Wage Base
8. Number of investment alternatives
9. Deadline to Establish a new retirement plan
1. Covered Compensation: $305,000
2. Defined Benefit Maximum Limit: $245,000
3. Defined Contribution Maximum Limit: $61,000
4. 401(k), SARSEP, 457, 403(b) Employee Deferral Limit: $20,500
**5. Highly Compensated Employee: **
* $135,000 OR
* 5% Owner
6. Key Employee:
* 5% Owner OR
* 1% Owner AND $150,000
* Officer AND $200,000
7. Social Security Wage Base: $147,000
8.0 # of Investment Alternatives Required: 3
9. Deadline to Establish Ret. Plan: Tax Filing Deadline PLUS extensions
Pension Plans vs. Profit-Sharing Plans
1. Legal Promise of the Plan
2. Are in-service withdrawals permitted?
3. Is the plan subject to mandatory funding standards?
4. Percent of plan assets allowed to be invested in employer securities
5. Must the plan provide qualified joint and survivor annuity and a qualified pre-survivor annuity?
Pension Plans:
1. Legal Promise of the Plan: Paying a pension at retirement
2. Are in-service withdrawals permitted: defined benefit pensions ONLY
3. Is the plan subject to mandatory funding standards: Yes
4. Percent of plan assets allowed to be invested in employer securities: 10%
5. Must the plan provide qualified joint and survivor annuity and a qualified pre-survivor annuity: Yes
Profit-Sharing Plans:
1. Legal Promise of the Plan: Deferral of compensation and taxation
2. Are in-service withdrawals permitted: Yes (after two years) if plan document permits
3. Is the plan subject to mandatory funding standards: No
4. Percent of plan assets allowed to be invested in employer securities: Up to 100%
5. Must the plan provide qualified joint and survivor annuity and a qualified pre-survivor annuity: No
Defined Benefit vs. Defined Contribution Plans
1. What is the annual employer contribution limit?
2. Who assumes the investment risk?
3. How are forfeitures allocated?
4. Does the plan have separate investment accounts?
5. Can credit be given for prior service for the purpose of benefits?
6. Loans?
Defined Benefit Plans:
1. What is the annual employer contribution limit: Not less than the unfunded current liability
2. Who assumes the investment risk: Employer
3. How are forfeitures allocated: Reduce plan costs
4. Does the plan have separate investment accounts: No, they are commingled
5. Can credit be given for prior service for the purpose of benefits: Yes
6. Loans: Loans CAN be made to common law employees (loan cannot be made to purchase equipment)
Defined Contribution Plans:
1. What is the annual employer deductible contribution limit? - 25% of covered compensation
2. Who assumes the investment risk? - Employee
3. How are forfeitures allocated? - Reduce plan costs, Reduce employer contributions or allocate to other participants
4. Does the plan have separate investment accounts: Yes, they are usually separate
5. Can credit be given for prior service for the purpose of benefits: No
6. Loans: Yes loans can be made to any employee AND owner as long as rules are equal
Payroll Taxes:
1. Employer Contributions
2. Employee Deferrals
Payroll Taxes General:
1. OASDI: 6.2% for BOTH Employer and Employee UP TO S.S Wage Base
2. Medicare Tax: 1.45% for BOTH Employer and Employee with no maximum
3. Additional Medicare Tax: .9% for ONLY Employee on amount over: 200k (Single); 250k (MFJ)
Employer Contributions:
1. Employers and Employees are exempt from payroll taxes on EMPLOYER CONTRIBUTIONS
Employee Elective Deferrals:
1. Must pay payroll taxes
Eligibility Requirements for Qualified Plans
Standard:
* Attain age 21 AND 1 year of service (12 month period of 1000 hours of service
Part Time:
* 500 hours of service for each of 3 consecutive years and are 21 years old at the END of 3 year period
2 Year Eligibility Exception (NOT available for SEPs):
* Employer can require 2 years of service before qualified to contribute, BUT plan participants are IMMEDIATELY vested
General:
1. If a plan wants determined entrance dates, they MUST OFFER 2 entrance dates in a given year
2. Must be eligible first day of the plan year beginning after the date the the employee becomes eligible
Defined Benefit 50/40
50/40 Test
* Must benefit LESSER of 50 employees or 40% of nonexcludible (eligible) employees
* ONLY CONSIDER ELIGIBLE (NON-EXCLUDIBLE) Employees
Top Heavy Plan: Define and Consequences
Define:
* More than 60% of the total accrued benefits of the defined benefit plan are for the benefit of key employees.
What is a Key Employee:
1. Owns more than 5% of the business
2. 1% Owner or more WITH compensation of $150,000 or more
3. Officer with Compensation OVER $200,000
Consequences for DB Plan:
1. Must be at least 2% x years of service x compensation factor.
2. Must reduce vesting schedule to 2-6 year graded OR 3 year cliff (DC Plan standard)
Consequences for D.C Plan:
1. 3% minimum non-elective contribution to all eligible employees or less if less provided to the key employees.
Permitted Disparity: Definition and Methods
Definition:
A technique or method of allocating plan contributions to employees’ accounts so that a higher contributions will be made for those employees whose compensation is in excess of the Social Security wage base
Methods:
1. Excess Method (Profit Share AND Pensions)
2. Offset Method (Pension ONLY)
Roth IRA Characteristics
- Contribution Limit: $6,000
- Catch-Up Contribution Limit: $1,000
- Income Limit - Married: $204k - $214k, Single: $129k - $144k, Married filed separately: $10,000 modified AGI
- Conversion from a traditional IRA account allowed: Yes (DOES NOT have an income limit)
- Qualified Distributions (not subject to tax or penalty): To be qualified, the account must be held for at least 5 years and the distribution must be made on account of a first time home purchase, disability, death, or on or after the attainment of age 59½.
- Distributions that are not qualified: Specific Ordering Rules: contributions first, conversions second, and earnings third
- Required Distributions: Not subject to minimum distributions during owner’s lifetime
Failing the ADP/ ACP Test (Solutions)
1. Corrective distributions:
* Requires a return of contributions to the highly compensated.
2. Recharacterization (TAX)
* Requires excess deferrals to be recharacterized as after tax contributions.
3. Qualified non-elective contributions (QNEC)
* The employer makes a contribution to all non-highly compensated employees’ accounts.
4. Qualified matching contributions (QMC)
* The employer contributes to the non-highly compensated employees who made a contribution.
ESOP Nonrecognition of Gain Treatment Requirements
- The ESOP must own at least 30 percent of the corporation’s stock immediately after the sale.
- The seller or sellers must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale and hold such securities three years.
- Qualified replacement securities are securities in a domestic corporation, including stocks, bonds, debentures, or warrants, which receive no more than 25 percent of their income from passive investments. The qualified replacement securities can be in the form of stock in an S Corporation.
- The corporation that establishes the ESOP must have no class of stock outstanding that is tradable on an established securities market.
- The ESOP may not sell the stock acquired through the rollover transaction for three years.
Types of Beneficiaries
Eligible Designated Beneficiary:
1. Surviving spouse for the employee or IRA owner
2. Child of employee or IRA owner who has not reached majority (At age of majority becomes a designated beneficiary)
3. Disabled or Chronically ill individual
4. Any other individual who is not more than ten years younger than the employee or IRA owner
* Beneficiary can receive distributions over their remaining single life expectancy.
* ONLY SPOUSES: Can roll into IRA in their name
Designated Beneficiary (non-eligible):
1. Any individual designated as a beneficiary by the employee (not meeting the definition above)
2. Any beneficiary greater than 10 years younger.
* Account balance distributed by the 10th anniversary of owner’s death
Non-Designated Beneficiary:
1. Non listed Beneficiary, Charities and some trusts.
Qualified Roth Distributions
Must satisfy BOTH Tests:
1. The distribution must be made after a five-taxable-year period.
2. The distribution satisfies one of the following four requirements:
* Made on or after the date on which the owner attains the age 59½;
* Made to a beneficiary or estate of the owner on or after the date of the owner’s death;
* Is attributable to the owner being disabled; or
* For first time home purchase (lifetime cap of $10,000 for first time homebuyers includes taxpayer, spouse, child, or grandchild who has not owned a house for at least 2 years).
3. REMEMBER: CORPUS CAN be taken out of ROTH IRA (NOT ROTH 401k) at any time WITHOUT tax or penalty
Prohibited (Not Allowed) IRA Investments and Transactions
Not Allowed Investments
1. Life Insurance
2. Collectibles
Investment Exceptions:
1. Silver; Gold; Platinum; Paladium Bullion
2. U.S Minted Coins (Eagles) NOT Foreign Coins
Prohibited Transactions:
1. selling/ leasing of IRA property
2. Lending or borrowing from IRA
3. receiving unreasonable comp for managing IRA
4. Pledging IR securities for a colateral
5. Buying personal use property with IRA
Additional Rules
1. Limited Partnerships; MLPs; K-1s: Creates Unrelated Business taxable Income; which can be taxable even within IRAs
SIMPLEs (IRA and 401(k)) (NEITHER ARE QUALIFIED PLANS:
* Application
* Established by What Date
* Ability to have Other Plans
* Annual Testing
* Vesting
* Employee Elective Deferral Contribution Limit
* Catch-Up Contribution for Age 50
* Employer Contribution
* Loans Permitted
BOTH SIMPLE IRA and SIMPLE 401(k):
1. Eligibility: $5,000 from employer in any 2 preceeding years AND expected to earn $5,000 in current year
2. Application: Limited to 100 Employees
3. Establishment Date: October 1 of 1st year
4. Other Plans: No; can only have SIMPLE
5. Annual Testing: None required if meet contribution requirements
6. Vesting: All contributions and deferrals are vested immediately
7. Elective Deferral Max: $14,000 (same for both)
8. Catch up (50): $3,000
9. Employer Contribution: 3% Match (NOT limited by $305k Income) OR 2% Nonelective (LIMITED by $305k Income)
10. SIMPLE IRA ONLY: can reduce to 1% for 2 of last 5)
- Loans ARE PERMITTED for SIMPLE 401(k) ONLY
- Cant be rolled or distributed for any reason within 2 years or there is a 25% penalty!
-
NOT A QUALIFIED PLAN
4. NO WITHOLDING ON WITHDRAWALS/ ROLLOVERS
Taxation of Group Disability
- Premiums paid by the employer are deductible by the employer and are not included in the employee’s gross income.
- When the employer pays the premium and the value is excluded from the employee’s gross income, any disability income benefit received by the employee is taxable to the employee.
- If the employee pays the entire premium with after-tax income or the employer pays the premium and the employee includes the premium payment in income, any benefits received will be considered tax-exempt.
Benefits for a Cafeteria Plan (Allowed and NOT Allowed)
Allowed Benefits:
1. Accident and health benefits (but not medical savings accounts or long-term care insurance).
2. Adoption assistance/ Dependent care assistance.
3. Group term life insurance coverage (including costs that cannot be excluded from wages).
NOT Allowed Benefits: (Fringe Benefits NOT ALLOWED for cafeteria plans)
1. Athletic facilities.
2. De minimis (minimal) benefits.
3. Educational assistance.
4. Employee discounts.
5. Lodging on employer’s business premises and Meals.
6. Moving expense reimbursements.
7. No-additional-cost services.
8. Transportation benefits.
9. Tuition reduction.
10. Working condition benefits.
General:
Cafeteria plans use PRE TAX DOLLARs to pay benefits
Split Dollar Life Insurance Methods (sharing cost of permanent life)
Endorsement Method:
1. The employer owns the life insurance policy on the employee and the employer pays the policy premium.
2. The employer withholds the right in the plan to be repaid for all of its premium either at the employee’s death or the surrender of the life insurance policy.
3. Usually any death benefit or cash surrender value in excess of the employer’s refund is paid to the policy beneficiaries
Collateral Assignment Method:
1. the Employee owns the life insurance policy and the employer makes a loan to the employee to pay the policy premiums.
2. In this case, at the employee’s death or at the surrender of the policy, the employer loan will be repaid and any excess will be paid to the policy beneficiaries.
